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GE's Plastic Surgery

The shift away from the plastics business toward diagnostics is risky.

Approximately 50% of General Electric's (NYSE:GE) net income comes from GE Capital, its financial services business. Therefore, anything a person writes about other aspects of the conglomerate's business should take this fact into account, and the remarks should be prefaced by a note saying anything the company does in its other business areas is likely to pale in comparison.

Still, it is hard to deny that GE has been doing a lot of cosmetic surgery to some of its smaller body parts lately. Already this year, the company has plunked down $8.1 billion to acquire Abbott Laboratories' (NYSE:ABT) diagnostics business, $4.8 billion to buy Smiths Group PLC's aerospace group, and another $1.9 billion to buy Vetco Gray in an attempt to bolster its oil-and-gas business.

To pay for this $14 billion splurge, it is widely expected that GE CEO Jeffery Immelt is shopping around the company's storied plastics business. According to a number of reports, he is hoping the division will fetch in the neighborhood of $10 billion.

I understand that Immelt wants to get out of the plastics business because it is not a fast-growing area, and that he prefers instead to focus on more rapidly expanding areas such as diagnostics, aerospace, and energy. To this end, I like the aerospace and energy acquisitions, but I don't like the moves into diagnostics or away from plastics.

Here's why. Just last week, GE announced that it had developed a new nano-ceramic material that was capable of withstanding extremely high temperatures. As a result, it is expected the company will be able to develop new and better-performing aircraft engines and gas turbines -- things that will aid in the growth of its aerospace and energy businesses.

This example of a new nanomaterial giving life to old ceramic products is just the type of boost that nanotechnology could also give to GE's lagging plastics business. After all, if nanotechnology can improve ceramic materials, why can't it also make any number of plastic products better, stronger, and lighter? My sense is that it can, and Immelt is missing an opportunity to apply this emerging technology to help to grow GE's plastic business.

Obviously, the decision is not mine to make, but if it is the commoditization of plastics that is driving Immelt out of that business, it is ironic that he wants to move aggressively into diagnostics.

This is because if there is one field where nanotechnology is likely to cause commoditization, it is in the diagnostics industry. For instance, new nanowires are being created by Nanosys -- an equity investment of Harris & Harris(NASDAQ:TINY) -- that could be capable of diagnosing hundreds of diseases on a single chip for a fraction of the cost of many devices now on the market. Other companies, such as Nanosphere and Quest Diagnostics(NYSE:DGX), are also aggressively developing less expensive and easier-to-use diagnostics.

Of course, there is more to the diagnostic business than just detecting disease, and many of these new devices will take some time to reach the commercial marketplace. But my point is that they are coming. Thus, I don't think the acquisition of Abbott's diagnostic business will have the long-term positive impact on GE's revenue and profits that Immelt is hoping for.

Just as real plastic surgery often begets more plastic surgery and, in so many cases, isn't really needed in the first place, so it is with GE's decision to "nip" its plastics business and "tuck" its diagnostic business. Bottom line: The conglomerate could be paying a lot for something that isn't really needed, and it would be better off just trying to take better care of its existing business.

Fool contributor Jack Uldrich has never had plastic surgery, and he doesn't think you need it either, because you're beautiful just as you are. He owns stock in GE. The Fool's disclosure policy wants to tell you there's a great future in plastics. Think about it.